Tesla: Blocking, Tackling, Waiting For A TD

May. 6.13 | About: Tesla Motors (TSLA)

Tesla (NASDAQ:TSLA) is playing a fine game. Model S is out performing and out selling other cars in its class as well as lesser electric cars from Nissan (OTCPK:NSANF), Ford (NYSE:F), and GM (NYSE:GM). Tesla management continues to execute well and Tesla's prospects are looking good. But investors should be aware of the on-going Tesla Hype Cycle because Tesla's stock price can, and from time to time has become detached from the reality of Tesla's business, market success and financial condition. As in football, good blocking and tackling should not be confused with the scoring of touchdowns.

Because Tesla's stock price is driven by enthusiastic (some might even say irrational) investor exuberance, how many Tesla supporters are engaged in the market at a given time can make Tesla shares go up, or go down. As vacation season approaches, investors should be prepared to discount that part of the share price attributable to hype and investor exuberance which may evaporate if Tesla fans unplug over the summer.

With a view to caution, let's look at what Tesla has been doing lately, what we night expect from first quarter earnings and see if Tesla has been just blocking and tackling, or if they scored any touchdowns.

Great Product

Tesla's Model S is an amazing product, something that is under appreciated by many of Tesla's detractors. It competes squarely on price and performance with the world's best sport sedans. And it does so with efficiency nearly double that of Toyota's (NYSE:TM) Prius hybrid. If Model S costs more that a Honda (NYSE:HMC) Civic or Chevy Volt, well so do the Mercedes, Audi, BMW, Jaguar, Aston Martin and Massarati cars against which it competes.

Tesla Model S

Tesla Model SClick to enlarge
(Click to enlarge)

Aston Martin Rapide S Austen Martin Rapide SClick to enlarge
(Click to enlarge)

Tesla Model S vs. Rapide S
Feature Model S

85kWh Performance

Rapide S

V-12 6.0L 550hp

Doors 4+Hatch

(retracting door handles)

4+Hatch

(retracting door handles)

Seats 5+2 4
MPG

city/hwy

88/90 13/19.9
0-60 4.2s 4.7s
Price $88,000+ $202,000+
Click to enlarge

In the world of exotic, aluminum bodied sport sedans, Tesla delivers the requisite retracting door handles, more seats, more MPG and more acceleration at half the price. Unfortunately, not all car buyers count such cars among their affordable choices.

Model S exemplifies both the reality and the hype surrounding Tesla. It is a truly great car, competitive with the best ICE cars in its class, but with Model S, Tesla is never going to conquer the mainstream automotive world. Model S is exactly what Tesla claims, the second of a three step strategy to eventual production of affordable, GenIII electric cars. Continuing to ramp production while delivering quality Model S cars is an instance of good execution on Tesla's part. It is not the end-game however and an enthusiastic market may be valuing Model S more like a touchdown than the good blocking and tackling that it is.

Good, but no touchdowns

Tesla has made a number of intriguing announcements and done some good things this year. While these mostly qualify as good execution - good blocking and tackling - nothing Tesla has done or announced since the first of the year is a fundamental game changer for the company. There have been no touchdowns.

  • Production Ramp: Tesla's Fremont factory seems to be humming along, making cars at about the design rate. This is good news for the company, but hardly a breakthrough or game changer. If Tesla hadn't achieved this kind of manufacturing execution, they would probably be dead by now.
  • Profitability: Tesla's announcement of non-GAAP and GAAP profitability really sent the stock soaring, and this is indeed an important milestone for any startup enterprise. There are however a couple of things investors need to look closely at in the upcoming financial report. Income from ZEV credits is likely to be a significant contributor to profitability and this income stream will not be sustainable as more and more manufacturers are bringing "compliance cars" to market. If Fiat / Chrysler are losing $10,000 on every Fiat 500e they sell, this is still better than buying ZEV credits from Tesla at $16,000 a car. And then there is the impact of rescheduling the DOE loan ...
  • DOE Loan Rescheduling: Tesla's DOE loan agreement includes a large number of stock options that vest to the Government if the loan is not repaid early. By agreeing a more rapid loan repayment schedule, Tesla may have convinced their auditors that these loan guarantee related options are no longer "in play" and that would have a large impact on Tesla's GAAP results. This is another example of good execution by Tesla, but it also represents a one-time event with no forward sustainability as far as Tesla's financial performance is concerned.
  • Financing Program: Ah the Tesla financing miracle! Every serious car company needs to establish a financing facility that allows customers to finance or lease their cars. Established manufacturers don't generally need to give a guarantee of resale value to get banks to participate because existing models have established residual value in the marketplace. And even if GM may have needed to guarantee a residual floor for the Volt, Daniel Ackerson didn't need to provide a personal guarantee. While Tesla more or less adroitly managed a creative financing facility for Model S, what it did is hardly going to reshape the auto industry. Hopefully it will let them continue selling cars. This is another instance of good blocking and tackling, but it is definitely no touchdown.

Red Hot Hype Cycle

The market responds one way or another to most any announcement coming from Tesla. Tesla fans cheer wildly every time there is action on the field, but as I pointed out earlier good blocking and tackling is not the same thing as scoring touchdowns.

Volatility is something every Tesla investor is familiar with. This stock goes up, and it goes down. A lot. Very much like fans at a football game, the volume of cheering - and the amplitude of TSLA price excursions - has something to do with the number of fans cheering the team on.

The following chart illustrates how important investor attention is to both the volatility and overall trend of Tesla share prices. Since Tesla's IPO in 2010, the amplitude of price excursions and the overall price trend have been markedly lower during the summer when investors are less engaged in the market.

Seasonal Behavior of Tesla Stock Price Seasonal performance to TSLA stock price.Click to enlarge
(Click to enlarge)

Tesla shares have historically performed less well from May 1 to September 30 than at other times of the year. This may result from a lower interest level in the stock (less hype) over the summer whilst many investors are on vacation.

Considering the recent exuberant market response to Tesla announcements more representative of good blocking and tackling than scoring touchdowns, and the pending arrival of summer when both volatility and price of Tesla shares historically declines, Tesla "longs" should pay careful attention and hedge their positions or bail out as summer approaches.

Tesla customers are a loyal bunch.Even if the red hot Tesla hype fades a bit this summer, the company is likely to continue successfully forward. Tesla Model S is a truly spectacular product that has gained market acceptance and a loyal customer base. And even if Tesla's recent performance hasn't included any touchdowns, they continue blocking and tackling well and the game isn't by any means over.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TSLA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.